WorldCom black hole even more massive – court report

An initial court-ordered report into the rise and fall of WorldCom Inc has detailed a corporate culture that was focused on meeting analysts' expectations at all costs and warned that further massive restatements of the company's previous financial results may be necessary.

The report by Dick Thornburgh, a former US attorney general who was appointed bankruptcy examiner by the US courts in July, coincided with an announcement by WorldCom that it was implementing a program to "restore confidence, rebuild integrity and business practices".

But this may be a forlorn hope in the light of Thornburgh's report. The 122 page report said that as Clinton, Mississippi-based WorldCom grew in size and complexity, its internal controls did not keep up. The company's voracious appetite for acquisitions was opportunistic and did not follow a strategic plan, the report continues, and made it difficult for investors to compare results from year to year. At the same, the firm's stock price was the "fuel" for the acquisitions and the company needed to keep its price high to continue its growth.

Throughout this, former CEO Bernie Ebbers dominated the company, the report said. Critical questioning was discouraged and transactions were not considered by the board in depth. The board's compensation and stock committee "seemed to abdicate its responsibilities to Mr Ebbers," approving compensation that appeared "overly generous and disproportionate to either the performance of the company or competitive pressures."

WorldCom's former auditors Arthur Andersen comes under fire in the report, as does the carrier's primary investment banker, Salomon Smith Barney (SSB). The relationship with SSB was described as "unusually close and problematic."

The report concludes that WorldCom "put extraordinary pressure on itself to meet the expectations of securities analysts," which created an environment where "reporting numbers that met these expectations, no matter how these numbers were derived, apparently became more important than accurate financial reporting."

WorldCom boosted earnings by drawing down on reserves, the report says. When regulators refused to countenance WorldCom's merger with Sprint Communications, which would have replenished and increased its reserves, "WorldCom did not have adequate reserves to draw down as a vehicle to increase earnings." Shortly after, WorldCom began boosting its figures "by converting substantial portions of its line cost expenses into capital items."

The rest is history, with the company being forced to make restatements to the tune of $3.8bn in June, and another $3.8bn soon after, the report said.

Thornburgh and his team are still investigating WorldCom, the report said, "but we believe our investigation will reveal that there were improper and unsupported adjustments that go beyond the more than $7bn in adjustments already restated by the company."